Articles published in the Japan Times

Monday, July 16, 2007NOT TO BLAME FOR 'BUBBLE'Miyazawa knew economicsObituaries for former Prime Minister Kiichi Miyazawa, who died recently at age 87, agreed that he was a statesman and a genuine internationalist. But some — those from Nikkei, Japan's leading economic media group, especially — also criticized him as a Keynesian economist responsible for Japan's economic troubles in recent years. It is time to set the record straight.Miyazawa was finance minister in the crucial pre-"bubble" years of 1986-88. At the time the yen was appreciating wildly in the wake of the 1985 Plaza Accords (it was to more than double in value against the dollar). Endaka fukyo — recession induced by the high yen — was a favorite media topic. Meanwhile, Washington was pressuring Japan to boost its economy as a way of reducing its trade surplus.The obvious answer was for Japan to boost domestic demand by expanding government spending — the Keynesian approach. In so doing it would not only reflate its weakened economy; it would also ease the pressure to export and curb the yen's rise in the process — three birds with one stone. That is what the Keynesian, demand-oriented Miyazawa wanted to do. (As a young bureaucrat in the early 1940s, Miyazawa had studied the works of my father, economist Colin Clark, who had worked with Keynes at Cambridge).But by this time the anti-Keynesians were beginning to dominate economic policymaking worldwide. Using public funds to boost economies was being criticized. The monetarist approach — the easing of the money supply and low interest rates — was favored. It was this monetarism, not Miyazawa Keynesianism, that triggered the excessive rise in asset prices of the late '80s now known as the "bubble economy." To make things worse, Miyazawa's successors foolishly delayed the monetary tightening needed to kill the bubble. Japan has been living with the consequences ever since.In 1991 Miyazawa was made prime minister. He realized better than most the snowballing, demand-crippling effects of bubble collapse. But his proposal of an emergency injection of several trillion yen to save the banking system was killed by the free market, anti-interventionist fundamentalists, especially Keidanren, Japan's most influential business federation. When, a decade later, the government had to inject many trillions of yen to save the banks, Keidanren did not object.Despite this setback, Miyazawa's prime ministership saw a return to the fiscal demand-stimulating policies needed to revive the economy. By the mid-'90s the economy was well on the way to recovery. But the advent of the Hashimoto administration in 1996 saw the anti-Keynesians back in the saddle. The grinding recession that followed, then continued well into the years of the even more anti-Keynesian regime of former Prime Minister Junichiro Koizumi, was the direct result. The only uptick in the economy came during the brief Obuchi and Mori administrations in between, while Miyazawa was again finance minister.Miyazawa's misfortune was to be caught up in two mistaken attacks on the Keynesian demand-oriented principles that had guided Japan's successful economic management for decades. One criticism said that they had caused the stop-start stagflation of the postwar Anglo-Saxon economies. That was true to a point, but that particular abuse of the Keynesian approach was due to the special problems with those economies — excessive consumption and inadequate supply. Japan's problems were the exact opposite — excessive supply and inadequate demand. For much of the time, anything that boosted demand, including greater government spending, was welcome.The second attack focused on the increase in Japan's official debt as a result of past government spending. But that in turn was due to Japan's excessively high level of personal savings forcing high levels of government spending to fill the demand gap. It could have and should have been solved by a more efficient tax system. Besides, sensible public spending to reflate a broken economy can actually reduce official debt by rapidly increasing tax revenues. Anti-Keynesian policies to reduce official debt by cutting government spending can actually increase the debt, as we saw only too painfully during the Koizumi years.The 1997 Asian financial crisis saw Miyazawa's economic wisdom frustrated once again. He proposed an Asian monetary fund backed by Japan to rescue the weaker Asian economies. The United States, ever sensitive to any threat to its Asian hegemony, insisted that the International Monetary Fund with its economic fundamentalist approach should do the job, which it did, to the benefit of many U.S. investors and few Asian economies.Miyazawa's achievements went beyond the economy. Like many of his generation, he was a firm admirer of postwar America for helping Japan recover and discover democracy. But he also wanted closer links with Asia, including China. While approving the use of Japanese troops abroad for peacekeeping purposes, he remained a firm pacifist to the end. He was a man of balance for his times.He was criticized for involvement in the so-called Recruit scandal. In fact, that nonscandal was simply an attempt by the Recruit company to make sure its issues of new shares went into the hands of responsible people it liked rather than the usual collection of gangsters, speculators and corrupt securities companies that dominated new share issues at the time. The fact that many of its share recipients made profits was largely because almost-new shares issues were profitable in Japan's go-go stock markets at the time.Miyazawa was pushed out of the prime ministership in 1993 by an ever power-hungry Ichiro Ozawa wielding the so-called electoral reform issue. In fact, by opposing the single-seat constituency "reform," Miyazawa was trying to preserve the valuable role of independents and the smaller political parties. The result of those so-called reforms is what we see today — the domination of Japanese politics by two Tweedledee-Tweedledum political parties and a semi-religious party able to mobilize supporters easily. Japan's uncritical love affair with the word "reform" has continued ever since.